Banking Competition and Real Sector Stability: Does the Risk Shifting Channel Exist?
Otto-von-Guericke University; Halle Institute for Economic Research
April 12, 2011
Recent theoretical literature in the field of banking competition and bank risk stresses the importance of interactions between banks and firms and suggests that banking competition impacts firm stability. But empirical evidence whether banking competition increases or decreases stability of firms in the real sector is scarce. This paper investigates the effect of banking competition on firm stability for a sample of small- and medium-size enterprises (SMEs) in Germany between 1996-2006. Results show that less banking competition is beneficial for firm stability. This rejects recent suggestions from the banking literature that banks may exploit their competitiveness and increase incentives for firms to undertake more risk. Thereby, this paper suggests the often cited charter value paradigm in banking to be right.
Number of Pages in PDF File: 42
Keywords: Banking competition, Firm stability, Risk shifting
JEL Classification: G21, G32
Date posted: November 13, 2011